The Harper government has tried to create a delicate balance between the demands of powerful incumbent wireless carriers and the needs of fledgling new entrants in the spectrum auction and foreign telecom ownership rules it announced Wednesday.

The hotly-desired 700 MHz spectrum auction will be held in the first half next year, Industry Minister Christian Paradis said. But against the pleas from newcomers like Wind Mobile, Mobilicity, Public Mobile and Videotron, the government will not set aside spectrum strictly for them.

Instead, spectrum will be reserved for small carriers in 14 bidding regions that will be created. The caps on the amount of spectrum incumbents can buy will be “less intrusive” than the set-aside of fixed spectrum blocks in the 2008 spectrum auction that Wind and other new entrants leveraged to get into the business, Paradis said.

At the same time the government said it will allow foreign companies to buy 100 per cent of Canadian telecom companies that have less than 10 per cent market share. That may help the new entrants afford to bid in the auction and to broaden their networks.

Industry Minister Christian Paradis called it a “winning package for Canadian families,” that will extend high speed wireless data service to rural areas and increase competition.

“We had new entrants that came in in 2008,” Paradis said, that resulted in more competition and lower wireless prices. “Now we want to sustain competition.” Paradis said the government has several goals, including ensuring competition. But one of them, he added, is to ensure that subscribers have a choice of at least four cellular carriers everywhere in the country.

That doesn’t mean that the fourth carrier would necessarily be a national carrier. Wind Mobile says it wants to be a national carrier on the scale of Bell or Rogers. Others, like Public Mobile, which operates in Ontario and Quebec, are satisfied to be regional carriers.

On the crucial auction rules, Ottawa will apply caps that it says will enable four or more service providers in each of the 14 bidding regions it creates to obtain spectrum. That will be the rule in next year’s 700 MHz auction and the 2500 MHz auction to be held in 2014.

In the case of the 700 MHz spectrum, Paradis said, a limit on prime spectrum will be imposed on Bell, Rogers and Telus, which, like a set-aside, will effectively reserve prime spectrum for new entrants and regional providers like MTS Allstream and SaskTel.

Two of the new entrants had markedly different reactions to the auction rules. Wind Mobile chairman Anthony Lacavera said he is very unhappy with the structure, saying it won’t allow new entrants to buy enough bandwidth to compete robustly with the incumbents. “We still can’t compete on a level playing field,” he complained.

The rules will force new entrants to merge, he said, because their future is threatened. In addition, the auction rules will impair the ability of new entrants to find new investors he said, despite the proposed foreign ownership changes which he welcomes.

But Mobilicity president Stewart Lyons was enthusiastic at the rules. “We’ll bid and we’ll bid aggressively” at the upcoming auction, he said.

He would have preferred the government set aside all the spectrum for new entrants, or at least reserved two of the four blocks only for new entrants. But, he added, the way Ottawa structured the rules is a “reasonable compromise.”

“At least it means a new entrant will get spectrum in every market, and I think it will be us because we’ve already been approached for financing” by investors. The proposed foreign ownership rules, he added, are nice to have but for Mobilicity not a necessity.

Asked to comment, Lacavera said he disagreed with Lyons.

Ron Gruia, a telecom analyst at Frost & Sullivan Inc., said the government “managed to find a Canadian solution in the sense that it equally upsets the incumbents and the new entrants.”

“There’s not set-aside, which obviously upsets Wind a little bit, but at the same time, the incumbents are also obviously going to be a little upset because the spectrum cap kind of works like a de facto set-aside.”

At the same time, he sees the new policy direction as one that favours smaller carriers like Wind in the long term as they’ll be less susceptible to pressure from the giants. “With this, it actually ensures that they will have a chance to get spectrum and won’t be squeezed out.”

Gruia says the announcement marks a disruption of the status quo for Rogers, Bell and Telus which he describes as a “the troika of incumbents.”

“With this, he says, “we ensure that the fourth player is going to still survive,” adding that the new relaxation of rules on telecom foreign investment will also be good news for Wind.

However, he says he’s wary of what Bell, Rogers and Telus may try to do in the future, despite the government’s actions to level the playing field. “We’ll have to stay cautious and make sure the incumbents don’t find a way to game the system.”

Robert Yates, co-president of the Montreal-based telecommunications consultancy LeMay-Yates Associates, called the package “a bit of a compromise” between the demands of incumbents and new carriers.

“Certainly the (new) entrants won a couple of things,” he said, pointing to the proposed foreign ownership changes, and some protection that Bell, Rogers and Telus can’t buy all the licences.

New entrants will be able to buy at least one or two blocks of spectrum in each of the 14 bidding areas across the country. But, he pointed out in Toronto there are three new entrants. “They might not be overly happy having to fight it out,” he said. But, he said, with the auction a year away there may be an acquisition or merger, particularly after the foreign ownership rules are changed.

Mark Goldberg, another Canadian telecom analyst, says the restrictions on the incumbents, who represent more than 90 per cent of wireless subscribers, could result in a net loss for the “digital economy” as a whole. “I have trouble understanding the rationale for forcing upon them a higher cost structure that obviously gets passed on then to their customers.”

On the new spectrum policy, he says it is moving ahead too slowly and “delaying the opportunity for Canadians to catch up to the U.S.”

“I guess the only message there is, ‘why are we taking so long to hold the auction’? Why are we waiting a full year before auctioning 700? And what’s motivating waiting another year to do 2.5 [GHz]? Now that the decision has been made, why aren’t we just getting on with it?”

Officials at Public Mobile and Bell said they are still studying the announcement and won’t comment until Thursday.

Manitoba’s MTS Allstream said it is still studying the spectrum cap rules, but it welcomed the government’s promise to allow for foreign telecom investment, which will benefit the company.

“For MTS Allstream this announcement means greater access to capital and the potential to open up valuable new opportunities, particularly for Allstream. The removal of these restrictions will allow Canada to assume its place as a destination for investment and opportunity in the digital economy, ” CEO Pierre Blouin said in a statement.

In a statement Vancouver-based Telus said it believes the auction rules are balanced. However, it added the carrier is “disappointed the government has chosen a partial and asymmetrical approach to foreign ownership and we hope that this is just a first step in the process. We would encourage the government to work towards further liberalization that would put us on an equal footing to our global trading partners and lead to even more innovation.”

The new entrants also didn’t win in one other crucial area: Forcing the incumbents to offer so-called “soft-handoffs” to competitors roaming on their territory. When a Mobilicity subscriber, for example, crosses into a Rogers zone during a call, the signal drops. The subscriber can reconnect, but looses a seamless call. This is what the industry calls a “hard handoff.”

Paradis said Industry Canada will extend and improve the roaming policies it instituted in 2008, which require wireless service providers to provide competitors with roaming capability. But he won’t order an end to hard handoffs.

During industry submissions on setting the auction rules, some carriers said if they didn’t get favourable rules it would impair their ability to extend high speed wireless to rural areas. Paradis said Wednesday that Industry Canada will impose rural rollout conditions for auctioned licences in the 700 MHz band. In each licence area, companies that have access to two or more blocks of 700 MHz spectrum, through licences obtained in the auction or through spectrum sharing with competitors, will be required to deploy services to 90 per cent of their existing broadband mobile coverage area within five years, and 97 per cent within seven years of licensing.

Finally, as expected the government will set aside 10 MHz of spectrum in regions across the country in the 700 MHz band for a wireless public safety network. This follows a decision made last week by the U.S. government to do the same. While users of the two networks will be able to talk to each other, they will operate differently. The U.S. envisions a single network, while Canadian public safety officials are looking at a network of local networks. Details of the Canadian approach have yet to be worked out.